Introduction to Money and Finance

Introduction to Money, Finance, and Currencies

• Money is a generally accepted medium of exchange, store of value, and unit of account. Trust and collective belief are crucial.
• Commodity money: Historical coins valued by their metal content (e.g., gold).
• Token money: Modern coins/notes represent a value but not backed by metal.
• Fiat money: Most current money, valued by government trust/authority.
• Spanish exploitation of Potosi silver mines enriched Spain but impoverished locals. Modern lithium mining faces similar issues.
• Banks include commercial banks (personal deposits) and central banks.
• Central banks manage monetary policy, public debt. Examples: Bank of England (1694), Federal Reserve (1913), Bank of Canada (1935).
• Canadian banking reforms (1967) introduced deposit insurance and expanded into mortgages.
• Deposit insurance (up to $100,000) protects deposits, proved effective against bank failures (like in Alberta).

Dollar's Global Dominance and Impact

• U.S. financial sanctions on Russia exposed the dollar's global influence. Many countries rely on dollars/euros for large reserves.
• Dollar dominance stems from military/economic power and universally accepted liquidity/cheap currency trades.
• Federal Reserve interest rate increases strengthen the dollar, making dollar debts pricier, reducing export competitiveness.
• Global synchronized economic tightening is occurring.
• Developing countries (e.g., Sri Lanka, Argentina) face crises due to high costs of dollar-denominated debt/imports.
• Developing countries (like Brazil, Thailand) prefer local currency borrowing to lessen reliance on dollars.
• The dollar's resilience is due to its ingrained role in finance and geopolitics. A mild US recession, and inflation reduction are ideal for global stability.

Exchange Rate Systems

• Free-floating: Currency value determined by market forces (e.g., British pound).
• Managed-floating: Currency mostly floats, but central banks intervene (e.g., Brazilian real, Indian rupee, Singapore dollar).
• Fixed exchange rate: Currency pegged to another currency/basket, requiring central bank intervention (e.g., Hong Kong dollar to USD, Bulgarian Lev to Euro).
• Currency board system: Domestic currency fully backed by foreign reserves (Ecuador, Zimbabwe).
• Countries like China, Jamaica, and Croatia use semi-fixed systems.
• Most developed countries (Canada, UK, USA - free-floating) prioritize autonomy over interest rates and monetary policy.
• Techniques include capital controls and central bank intervention (buying/selling reserves, interest rate adjustments)

Euro History and Role

• The euro is the common currency for most (but not all) EU members. Denmark has opted out .
• Early efforts towards a unified currency stem from the Treaty of Rome (and the Bretton Woods system which was based on fixed exchange rates).
• The 1971 collapse of Bretton Woods led to the European Monetary System (EMS)
• The European Monetary System (EMS) used the European Currency Unit (ECU) and an adjustable exchange rate mechanism.
• The 1992 Maastricht Treaty solidified the monetary union plan and set convergence criteria.
• The 1999 launch of the euro led to the Eurozone of 19 member countries (2002 marked introduction of physical currency)
• The EU aims to strengthen the euro's global role. Initiatives like the Next Generation EU (NGEU) bond program back the Euro as investment alternative.
• Challenges to the Euro's global role include lack of a unified fiscal policy and insufficiently integrated capital markets (compared to US Markets).

Big Mac Index

• The Big Mac Index compares global currency values using the price of a Big Mac.
• Intended for illustrative purposes, it helps determine currency over/under-valuation using purchasing power parity (PPP).
• PPP suggests that in theory, identical goods should cost the same across countries in the long run, reflecting exchange rates.
• Too simplistic for precise speculation, relying on long-term trends instead of volatility. The index does not account for diverse economic policies etc.

Explore the fundamental concepts of money, finance, and currencies in this quiz. From the historical significance of commodity money to the role of banks and central banks in modern economies, this quiz covers essential topics. Test your understanding of different types of money and the impact of global financial systems.